Readers React to The Taxman Cometh

A few weeks ago, I wrote about the tax problems created by the move toward multiline video slot machines and multihand video poker games. A reader had complained that he was playing 50 Play Poker, and that he'd had 50 hands on one play that added up to a total payout of $1,400. Before collecting, he was required to sign a tax form even though no individual hand reached the $1,200 threshold for reporting slot wins to the Internal Revenue Service.

The reader likened playing 50 Play to playing 50 individual hands. If none was $1,200 or more, the casino would not be required to file a tax form. The IRS, unfortunately, doesn't agree. Even though you see 50 hands at once on 50 Play, the IRS regards it as one game and the $1,200 threshold applies to the total payout.

That column stirred up some action in my e-mail box, Betkol@aol.com, mostly from readers agreeing that the tax code should be updated to make the reporting requirement proportionate to bet size.

There were a couple of different takes. One regular reader offered no sympathy:

First, I noticed that the player's e-mail indicated that he was playing max coins on a 25-cent 50 Play machine. He further stated that the total played per hand would then be $67.50. I think that amount would be $62.50. Right?

Second, it seemed very ironic that this player was so concerned about paying his taxes on that $1,400 payout when he was financially able to sit at that machine and play $62.50 per hand.

A maximum-coins wager on quarter 50 Play is indeed $62.50, not $67.50 -- a bet that's far beyond my bankroll. For 50 Play Poker, give me nickels with decent pay tables, please.

Still, some well-heeled gamblers play 50 Play not only for quarters, but for dollars. Empress Joliet, which has dollar 50 Play machines, put them in at players' requests. A maximum wager is $250.

That leads to a prime example of how badly out of touch with current gaming technology tax requirements are. Let's say you're playing 50 Play Double Bonus Poker, where straights pay 5-for-1. If you're making a maximum $250 bet, a straight brings $1,250, above the reporting threshold. All higher-ranking hands -- flushes, full houses, four of a kinds, straight flushes and royal flushes -- also are above the threshold.

The payback on that dealt straight brings you enough only to play five more hands, but you're stuck with a tax form. Even flushes and full houses will just keep you going for a bit, but don't guarantee a winning session.

The player will get a dealt straight, flush or full house an average of about four times an hour. That doesn't mean the player is winning. He or she may be losing thousands even as the tax forms pile up. An Illinois taxpayer who itemizes can deduct gambling losses to offset wins on federal taxes, but not on state taxes. The player loses, then loses some more to the state.

Another noteworthy e-mail came from Bob Loeb, co-author of the outstanding, comprehensive book Blackjack and the Law.

Loeb wrote:

Your column on taxes on jackpots was both timely and accurate. During this tax season, you may want to inform readers of other ways in which the tax code treats (or mistreats) gamblers.

The IRS requires that all gambling wins be reported as income (even if one has a net loss), and only allows one to subtract losses (up to the amount of wins only) as itemized deductions. Consider a typical gambler who goes to a casino five times during a year. Let's say he has no jackpots, but has wins of $200 and $300, and losses of $100, $350, and $400 on his respective visits. He must report the $500 as income. He can subtract $500 of his $850 of losses as an itemized deduction; he cannot subtract any losses if he takes the standard (non-itemized) deduction.

Although it is rare, the IRS can on occasion obtain gambling figures from one's casino player's card records. The lesson is to keep good records of losses as well as wins!

As Loeb points out, gamblers are required to report to the IRS all wins, even if they don't reach the $1,200 jackpot threshold that triggers a requirement that the casino have you sign a W-2G before it pays you. In practice, few gamblers report small wins, although the IRS could get sticky about it if it chose to do so. Keeping good records of both wins and losses is, indeed, the best defense.